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Consumer Power to Challenge Corporate Contracts Seems to Be Ebbing

Latest evidence: High court ruling on arbitration and class action

Like many people, James Pendergast usually didn’t pay much attention to his cellphone bill. But over the years, he noticed his carrier, Sprint, was charging “roaming” fees for calls he made when he was well within his Miami coverage area. Pendergast maintains that the charges, totaling about $20, were illegitimate.

His experiences are probably not unique. Pendergast’s lawyer says several million customers could be in the same boat. While it hardly seems worth the fuss for any one of those cellphone users to wage legal warfare over such a relatively small sum, Pendergast and his lawyer went to court, hoping to bring a class action lawsuit against the wireless company—and recoup millions for the customers they think have been overcharged.

That’s not as easy as it sounds. Buried deep within the terms and conditions of the Sprint contract is a clause that bans class action suits, instead requiring such customer disputes to be handled individually. Another section of the contract says all legal complaints must go to arbitration, an alternative method of resolving disputes, rather than to a courtroom.

Although they usually go unnoticed, such clauses have become routine, tucked into the fine print of all sorts of consumer contracts, from credit cards to cruise vacation tickets. According to a 2007 academic study, more than three-quarters of consumer agreements included mandatory arbitration provisions.

These clauses have a far-reaching impact on consumers. As AARP wrote in a friend of the court brief filed on behalf of Pendergast and the other Sprint customers, many corporations “have gone rogue,” using arbitration clauses “primarily to shield themselves from liability,” not as a way to select another forum for the disputes. Similarly, the class-action bans are “designed to cut off the only economical method available to most consumers,” AARP argued.

These provisions are used in contracts by a wide array of businesses—including cable providers, electronics manufacturers, nursing homes, homebuilders and others. “By including such clauses in the fine print of contracts, corporations ensure they fly below the radar of most consumers whose focus is getting the product or the service they want at the price they are willing to pay with the least amount of difficulty,” AARP’s brief said. “Such corporations know that few people will read or understand their import, and will usually have no opportunity or option to negotiate or reject such clauses.”

A disputed area of law

This tangle of mandatory arbitration clauses and bans on class action is now one of the most hotly contested areas of contract law. Advocates for consumers, employees and investors worry that several current cases show the courts moving to make it more difficult for individuals to use the legal system—and the potential collective power of class actions—to fight back against companies whom they believe have done them wrong.

Companies generally argue that arbitration provides a streamlined way to deal with disagreements. As the U.S. Chamber of Commerce said in a recent friend of the court brief filed at the U.S. Supreme Court, “Many members of the Chamber have found that arbitration allows them to resolve disputes promptly and efficiently while avoiding the costs associated with traditional litigation.”

At the same time, businesses often want to avoid class actions because, they say, they slow down the process—and can also cost them large amounts of money by bringing in all affected consumers, not just those relative few who are willing to file a lawsuit. “When you have a class action, the stakes are just a lot higher,” says Lisa Casey, a professor at Notre Dame Law School who specializes in corporate law.

But critics argue that arbitration is stacked against consumers. Companies often direct their business to the same arbitrators, who stand to gain if their rulings please those companies. The fine print in arbitration clauses often requires consumers to travel to a place of the company’s choosing and pay arbitrators by the hour to hear their disputes, with no right to appeal.

In addition, consumer advocates complain that because arbitration proceedings are usually private, a ruling against a company is less likely to prompt changes in corporate behavior than a public verdict in a courtroom. They also say that bans on class actions, whether for arbitration settlements or lawsuits, serve as a deterrent to people with low-dollar complaints against a company, even if thousands share their grievance. “The average person is not going to be served by these arbitration clauses,” says senior AARP attorney Julie Nepveu.

A ruling against class action

The Sprint customers are currently waiting for the Florida Supreme Court to decide whether the class-action ban in their contracts is valid. But the U.S. Supreme Court ruled April 27 on a related case, Stolt-Nielsen v. AnimalFeeds. While that case pitted business against business, some consumer advocates see the decision as an indication that the court may not stand in the way of such class-action bans, a potential blow to the ability of consumers to band together when individual action is impractical.

The case began when four big international shipping companies were accused of price fixing and sued by several of their customers. A federal appeals court ruled that because the parties had contracts containing arbitration clauses, the dispute should go to arbitration. The customers asked that their claims be combined and handled as a class action, but the shipping companies, led by Stolt-Nielsen, wanted to handle each case separately. The two sides agreed to let a panel of arbitrators decide whether the cases could be combined into one class action.

The parties agreed on a panel of arbitrators, and also that the arbitration clause in their shipping contracts didn’t address the question of class arbitration. But when the panel ruled that the case could proceed as a class action, Stolt-Nielsen went to court, arguing that the arbitrators had exceeded their power. An appeals court ruled against the shipping companies, pointing out that the parties had specifically agreed that the panel would decide the issue. But the Supreme Court sided with the shipping companies and reversed that decision, saying that the Federal Arbitration Act of 1925 doesn’t allow arbitrators to impose class arbitration when the parties to the dispute haven’t explicitly “agreed to authorize” that approach. (AARP filed a friend of the court brief in the case, on behalf of the shipping companies’ customers.)

A 5-3 opinion written by Justice Samuel Alito and backed by the court’s conservatives ruled that the 1925 law includes “the basic precept that arbitration ‘is a matter of consent, not coercion.’ ” Because class action is very different from disputes between just two parties, Alito wrote, “an implicit agreement to authorize class-action arbitration is not a term that the arbitrator may infer solely from the fact of an agreement to arbitrate.”

The decision means that AnimalFeeds and the others who brought suit against the shipping companies can proceed under arbitration, but they have to do it separately, rather than as a group. Lawyers for the shipping companies cheered the decision, and said the effects of the ruling “will be felt in future antitrust arbitration cases, as well as in other areas of substantive law.”

Risks for consumers

Justice Ruth Bader Ginsburg wrote a dissenting opinion in the case, which was joined by Justices John Paul Stevens and Stephen Breyer. (Justice Sonia Sotomayor did not participate in the case.) In the dissent, Ginsburg voiced a concern, shared by consumer advocates, that the elimination of class actions would sharply curtail the ability of individuals to bring suit at all. That’s especially a risk in instances where the claims being disputed are relatively small and just one person would have to bear the costs of the proceedings, rather than sharing them with others in the same situation. Without class proceedings, she wrote, “potential claimants will have little, if any, incentive to seek vindication of their rights.”

Ginsburg laid out the likely effect of the decision in terms that most consumers can understand. Quoting an earlier court ruling, she wrote: “The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.”

Analysts say the ultimate impact of the decision is unclear. As Notre Dame’s Casey explains it, the ruling could signal future problems for consumers, employees, investors and others who might be contractually obligated to use arbitration and hope to pursue a class action. The risk, she says, is that in a future consumer case, the court might rule “that consumers will not be allowed to bring a class action in arbitration.”

Arbitration under review

Consumer advocates point to another recent case, which they say provides more evidence of the Supreme Court’s tilt against individuals who sign contracts embedded with such clauses.

On April 26, the court heard oral arguments in Rent-A-Center v. Jackson, brought by a former employee of a Nevada Rent-A-Center, which rents out furniture, appliances and electronics. (AARP also filed a friend of the court brief on his behalf.) When he sued the store for racial discrimination and retaliation, the employer tried to get the case dismissed, arguing that the employment contract he signed said all disputes would go to arbitration.

The employee argued that the agreement was what lawyers call “unconscionable,” or so unfair that a court will prohibit it. The issue before the Supreme Court was whether a judge or an arbitrator should decide that question. During the hour-long discussion, several conservative justices showed little sympathy for those who sign such contracts—even if they have little choice.

Justice Antonin Scalia put it plainest, saying that even if someone must sign a lopsided contract, that doesn’t mean they’ve been forced to do it. “You can be a stupid person who voluntarily signs an unconscionable contract,” Scalia said. “Now, the courts may protect you because you are stupid, but you haven’t been coerced.”

Elizabeth B. Wydra, chief counsel of the Constitutional Accountability Center, a progressive think tank and law firm, warns that a ruling from the court in favor of arbitration “would mean that job applicants and employees—not to mention pretty much anyone who has a consumer contract with some fine print legalese—can be forced to give up their right to seek justice in the courts … even if they did not have a meaningful choice” about signing the contract. A ruling in the case is expected in the next few months.

A damper on claims

Meanwhile, as Pendergast and other Sprint customers wait for a ruling, Pendergast’s lawyer Doug Eaton says things must change. With mandatory arbitration and no ability to engage in class actions, it’s just too difficult for consumers with relatively small complaints to fight against big companies, Eaton says. “Nobody reads these contracts and nobody understands them, and it’s designed to be that way,” he says. “These clauses are designed to create loopholes, and ways out for these companies, so they can avoid liability.”

Instead, Eaton argues, courts need to show companies that they could be forced to court to defend against class action suits. “If it doesn’t matter if you get caught, because nothing is going to happen to you,” then there is no deterrent, he says. “It’s the Wild West all over again.”

Holly Yeager lives in Washington, D.C.

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